COLUMBIA, Md., Sept. 1 /PRNewswire-FirstCall/ -- Martek Biosciences Corporation (Nasdaq: MATK) today announced its financial results for the third quarter of fiscal 2010. Revenues for the third quarter were $117.2 million, up 51% from $77.8 million in the third quarter of fiscal 2009. GAAP net income was $11.9 million, or $0.35 per diluted share, for the third quarter of fiscal 2010, an increase of 33% compared to $8.9 million, or $0.27 per diluted share, for the third quarter of fiscal 2009. The revenues and earnings for the third quarter of fiscal 2010 include the results of Amerifit Brands ("Amerifit" or "branded consumer health products"), the acquisition of which was completed by Martek on February 12, 2010.
The third quarter of fiscal 2010 included charges related to the acquisition of Amerifit of $700,000 and charges related to the Winchester restructuring (see discussion below) of $600,000. Excluding these amounts, net of tax, the fiscal 2010 third quarter earnings on a non-GAAP basis would have been $12.7 million, or $0.38 per diluted share, an increase of 42% over the third quarter of fiscal 2009 (see Table II "Reconciliation of GAAP to Non-GAAP Net Income Measure" below).
Commenting on the quarter, Chief Executive Officer Steve Dubin said, "Martek's strong third quarter results reflect another good quarter for DHA and ARA sales to our infant formula customers, another record quarter of DHA sales in non-infant formula markets, strong sales of Amerifit's consumer branded products and improved gross margins. I believe that Martek's strong run rate coming out of fiscal 2010 will provide an excellent platform from which to grow as we continue to expand our DHA ingredients business beyond infant formula, begin to commercialize new products currently in development as consumer branded products sold through Amerifit's marketing and distribution channels and continue our efforts to reduce production costs. Accordingly, I expect growth in revenues, margin and earnings in 2011. It is also worth noting that, as a result of our strong earnings and robust cash flow generation, our Amerifit acquisition debt has been repaid earlier than expected and Martek is once again essentially debt-free. Martek's solid balance sheet and strong financial performance provides us with great flexibility which, among other things, should allow us to launch new Martek products, as noted above, during our next fiscal year, continue to prudently invest in our promising R&D pipeline and explore new complementary business opportunities."
Product sales in the third quarter of fiscal 2010 were $114 million, an increase of $38.9 million from the third quarter of fiscal 2009. This increase was partially attributable to the branded consumer health product sales of Amerifit which totaled $20.3 million in the third quarter. The remainder of the increase, or $18.6 million, was the result of sales of our nutritional ingredients in both the infant formula and non-infant formula markets. Demand increases outside the United States, particularly in Asia, were a key driver of the growth in both markets.
A breakdown of product sales for the third quarter and fiscal year to date periods (in thousands) follows:
Three months ended July 31,
Nine months ended July 31,
Food and beverage
Pregnancy and nursing, nutritional
supplements and animal nutrition
Total nutritional ingredients
Branded consumer health
Total product sales
Contract manufacturing and collaborations revenues in the third quarter totaled $3.2 million, of which approximately $900,000 relates to revenues associated with Martek's joint development agreement with a subsidiary of BP p.l.c. ("BP") for work on microbial oils for use as biofuels and the remaining $2.3 million relates to contract manufacturing activities. Consistent with previous disclosures, as of July 31, 2010, we have ceased nearly all contract manufacturing activities.
Gross Margin and Operating Expenses
Overall gross margin for the third quarter of fiscal 2010 was nearly 50%, an increase over the 44% gross margin realized in the third quarter of fiscal 2009. This improvement was largely due to both ARA and DHA cost reductions in the 2010 period and the positive impact of higher gross margins on branded consumer health product sales. Included in the third quarter's gross margin is the negative effect of approximately $200,000 (gross margin impact of 0.2%) related to one-time inventory step-up costs resulting from the Amerifit acquisition.
Research and development expenses in the third quarter of fiscal 2010 were $8.5 million, consistent with previously stated guidance and up from $6.6 million in last year's third quarter. As anticipated, the increase was due to the volume of the Company's pre-clinical research activities during the current quarter, primarily associated with the development of Martek's next generation DHA product for infant formula, as well as higher personnel costs. Martek's research and development focuses on both broadening the market applications for life'sDHA as well as leveraging the Company's microbial technology platform to develop new high-value product offerings. The Company continues to expect quarter-to-quarter fluctuations in research and development expenses mainly due to the timing of outside services, including third-party clinical trial services.
During the third quarter of fiscal 2010, selling, general and administrative expenses were $18.9 million, or 16% of revenue, consistent with prior guidance and an increase from $11.0 million, or 14% of revenue, in last year's third quarter due partially to the incremental expenses attributable to Amerifit.
Advertising and promotion costs during the third quarter totaled $5.6 million, or 5% of revenue. As a percentage of revenue, we anticipate similar advertising and promotion expenses for our current products each quarter, with such costs fluctuating from quarter to quarter due to the timing of particular advertising and promotional campaigns and the launch of new branded consumer health products.
As previously noted, Martek financed its February 2010 acquisition of Amerifit through available cash, a new term debt facility totaling $75 million, and $11 million drawn from a new revolving credit facility. Strong cash generation since the acquisition, including over $36 million in the third quarter of fiscal 2010, enabled a full repayment of all acquisition financing within five months of the acquisition date. As such, as of July 31, 2010, the Company returned to being essentially debt-free and now has its entire $100 million credit line available.
Restructuring of Winchester Manufacturing Site
In June 2010, Martek announced plans to restructure its Winchester, Kentucky manufacturing facilities in an effort to streamline operations, improve capacity utilization, and reduce manufacturing costs and operating expenses. As a result of this restructuring plan, a charge of approximately $600,000 was recorded in the third quarter of fiscal 2010 related to employee separation costs. The Company anticipates incurring approximately $1.0 million of additional restructuring costs in the fourth quarter of fiscal 2010 related to employee separation costs. Also, as previously announced, Martek is evaluating the potential sale or lease of a portion of its Winchester operations. Any such sale or lease would be contingent upon Martek's ability to maintain necessary production redundancies through continuing access to certain key processes at the Winchester facility and/or arrangements with contract manufacturers. We expect that the plant restructuring will result in a non-cash asset impairment charge or loss upon sale of $30 million to $40 million in the fourth quarter of fiscal 2010.
Significant Recent Events
- Extended Global Sole-Source Supply Agreement with Mead Johnson In June 2010, Martek extended its sole-source supply agreement with Mead Johnson & Company, LLC, for DHA and ARA for infant formula products. Under the terms of the amendment, Martek will remain Mead Johnson's global sole-source supplier of DHA and ARA for all of its infant formula products through at least December 31, 2015, an extension of four years beyond the earliest possible termination date of the current agreement. The amendment also provides graduated price reductions to Mead Johnson over the term of the extension, beginning in 2010.
- Supply Agreements with Chinese Dairies Martek entered into nutritional ingredient supply agreements with two leading Chinese dairies. A five-year agreement with Chinese dairy Mengniu Dairy Company Limited was executed for the use of Martek's life'sDHA in Mengniu-brand UHT milk and potentially other categories. In addition, the Company entered into a multi-year DHA and ARA agreement with Feihe Dairy, a wholly-owned subsidiary of American Dairy, Inc. Under the terms of the agreement, Feihe Dairy will purchase its total requirements of DHA and ARA for its new premium infant formula and growing-up milk products sold in China.
- Non-Infant Formula Product Launches with life'sDHA
- Foods and Beverages O' Sole Mio Vivi Bene® medaglioni with basil and O' Sole Mio Vivi Bene® medaglioni with sundried tomato (Les aliments O'Sole Mio Canada); Dairyland Cool Ones yogurt (Saputo Inc. Canada); Little Bear® Kid Growing Milk (Uni-President China); Babyliqi Professor Qiqi Drink